Value investing, stock market advice and online trading blog – Roger Montgomery Insights blog

When to sell Rule #1 is: No junk policy. In the second part of Roger’s selling mini-series, he identifies Rule #2: Expensive.

While market declines alone don’t prove merit in selling shares, the broad declines do suggest a disciplined approach to shares significantly above an estimate of intrinsic value is necessary. For me, if the businesses are also of a lower quality in terms of our A1-C5 ratings, for example Asciano, Amcor, Westfield or Santos – there is an additional urgency to review.

Three weeks ago these C-rated businesses were all trading at prices significantly higher than an estimate of intrinsic value. Fast-forward to today (19 August 2011) and despite the falls, Safety Margins are are stubbornly high:

Asciano: -75 per cent
Amcor: -39 per cent
Westifeld: -46 per cent
Santos: -76 per cent

For us, it is neither here nor there whether you agree with our valuations and therefore Safety Margins. What is important for us and the portfolio we manage, is the combination of quality and value. In the absence of either trait, we would be unlikely to remain a holder of the shares.

It can be potentially permanent devastating holding shares in poor quality businesses at prices significantly above value.

Imagine you acquired shares in a business today for $2 and estimated those shares to be worth $4, rising to $4.10 the following year. Then suppose after six months the share price rises to $3.00.  What would you do?   Value.able Graduates, are expected to answer that question correctly.  Now imagine the price of those same shares has risen to $6 in the same time frame. Would your answer change?

It may be tempting to set up some hard and fast rules about when to sell. I am not as comfortable with this approach as I am with the idea that the appropriate premium above intrinsic value at which to sell depends on the future prospect for the company and therefore its intrinsic value for the future.

Your response may be that there is greater uncertainty in future valuations. If that is your view, then you should sell.

Whilst we should not try to predict the future, it is important to look through a conservative telescope. What will be the value of each company in your portfolio next year? And the following year? Understanding the business and using that understanding to help establish prospects for intrinsic value appreciation in the future is a vital component of the Value.able approach, we advocate here.

If you are yet to join the Graduate Class, order your copy of Value.able immediately at ‪http://www.rogermontgomery.com/. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Value.able TV #5 was recorded at Montgomery HQ on 19 August 2011.

Posted by Roger Montgomery’s A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 19 August 2011.

Visit ‪‪http://www.rogermontgomery.com/ for Roger Montgomery’s step-by-step guide to valuing the best stocks and buying them for less than they’re worth.

Following the release of their full year results, Roger spoke with senior management at JB Hi-Fi and discussed their cashflow and working capital.

JB Hi-Fi scores an A3 (down from A1) thanks to a debt-funded buy back of shares. It is nonetheless a company with great cash flow. Value.able Graduates paying close attention to Cashflow in JBH’s latest result may have been concerned by the large jump in inventory, which had a detrimental impact on Cashflow from Operations since last year.

So, what did Roger discover?

In 2010 JBH stores were cycling low inventory numbers. Arguably this resulted in a sell-out of stock, which was due to under-provisioning,

Stepping back and looking over time at a pre-store level, Roger says “If you have a look at the inventory on a per store basis, $2.2m – $2.6m per year, it’s fairly consistent. I’m not concerned.”

Roger suggests the future is interesting for JB Hi-Fi. If store growth continues at the current rate (13-16 stores per year) for the next three to four years, then by the time they reach 214 stores, there will be a lot of free cash. Extra cash from the maturity of existing stores, combined with a reduction in debt, will see a very cash rich JBH.

What will management do with the extra cash?

In Roger’s view, management have three options: increase dividends, buy back more shares or make a [silly] acquisition.

Roger’s estimate of JBH’s Value.able intrinsic value in 2012 is around $17, rising to $20 by 2013.

Will intrinsic value continue to rise after that?

“That will be largely dependent on what management does with that cashflow when it’s freed up” Says Roger, noting; “I think the future for JB Hi-Fi will prove to be a didactic experience for value investors.”

Value.able Graduates: What are your insights on Australia’s embattled retailers?

Value.able TV #4 was recorded at Montgomery HQ on 15 August 2011.

Posted by Roger Montgomery’s A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 15 August 2011.

It’s a common question. Stockbroker recommendations often travel from ‘Buy’ to ‘Hold’ then back to ‘Buy’, and then all of a sudden ‘Ceasing Coverage’ appears. Rarely is a ‘Sell’ mentioned, let alone maintained for any length of time.

So the question remains… should you sell after the stock market has fallen 511 points? Or when the share price of an extraordinary A1 business falls by as much as 26 per cent?

“Of course not, Roger!”, I hear Value.able Graduates shouting from the rooftops across the country.

In Chapter 13 of Value.able I describe my five rules for when to sell. In this video, I will elaborate on Rule # 1: No junk policy.

I will assume 1. You are a Value.able Graduate, 2. You have changed some part of the way you think about the stock market. I will also assume you can confidently pick an A1 company from a basket of so-called ‘blue chips’.

Your mission:  Go through your portfolio. Turn the stock market off and look at the businesses you own. Are you blessed with A1s? Or is your portfolio full of ‘blue chips’ that fail to make the A1 grade?

If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Value.able TV #3 was recorded at Montgomery HQ on 5 August 2011.

Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 9 August 2011.

The US stockmarket had its biggest one day selloff since the GFC last night.

Back on 1 December 2008 the Dow Jones plunged 679.95 points. Last night the US market dropped 511 points – that’s a 4.31% decline. All 2011 gains were wiped out.

The Dow Jones Index is now down 10 per cent since May. The US is officially in recession territory.

Humans instinctively have an aversion to a debt crisis, but not a solution. And how do investors (not Value.able Graduates) react in such an environment? With fear. And it is that fear that drove our market down 4 per cent today.

But has anything significantly changed that would result in the intrinsic value of Decmil falling 12 per cent since yesterday? I will let you judge and respond accordingly.

Value.able Graduates, stick to our mantra: put together a portfolio of extraordinary A1 businesses that you believe will be much more valuable in five, ten or twenty years time.

If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 5 August 2011.

I never dreamed a simple little question about the title of a video series would have sparked almost 300 comments. Thank you!

Your suggestions have been entertaining, insightful, and in some cases, ingenious. It has been wonderful to meet so many new Value.able Graduates, and also those of you who have observed from afar (for far too long!).

Here are some of our favourites…

Montyvision, Mike
Video.able, Ben
Montcommentary, Emily
The Value.able Low.Down, Sean
Cooking with Roger, Chris L
Value.Cast, Tim P
Report.Able (Peter
Roger Direct (Matthew R
Roger’s Montgom-o-logue, Robert F
Value.Blast, Rob
Rogernomics, Tony
RMTV, Tim
Value.Bytes, SapporoSteve
Roger’s 2 Cents, Anthony
Value.View, Craig
Value.vision, Jonesy
Value.able report, Orlando
Report.Able, Rod
Value.judgment, Mike
Invaluable insights, Lloyd
InCompany, MarkH
Vis.able, Grover
The Value.able View, Ken F
Talking Cents, Bruno
Video.ables, Nolan
Crunch Time, Brian A
Value.able Vision, Chris L
The Value.able Report, Ian
View from the Mont, Stuart
Value.Log, David
The Montgomery ReTort, Kim
Cents.Ability, Stephen

So without any further ado, the winner is… Value.able TV.

Mark came very close with Value.TV, however it was the final suggestion from Greg (and reassurance from Brad 17) that we have selected as the winner. Greg – I’ll personally sign you First Edition copy of Value.able when I return from Melbourne tomorrow afternoon.

Tune in later this week (maybe early next week) for Episode 2.

If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 29 July 2011.

We did something new today. Rather than write a second blog post, I thought I’d record one.

We haven’t settled on a title for these next-generation posts just yet. What’s your suggestion? The most creative will receive a personally dedicated First Edition copy of Value.able, so put your thinking caps on. Click on the comments button to leave your suggestion. Comments are now closed. Roger’s decision is pending.

Back to the video… Looking at the numbers, Wesfarmers and Woolworths both appear to be doing a good job. But what will these businesses look like in 5, 10 or 20 years time?

With the sales growth gap between our big two supermarkets closing, what does the future hold? And come September, how will the board of WES counter-attack WOW’s entrance to the hardware-warehouse market?

Whilst the stock market is focused on reporting season and Coles’ apparent eroding of Woolworth’s market share, I’ll continue to focus on quality and value. If investing was all about market share, we’d all rush out and buy Qantas. But that wouldn’t be a sensible, or indeed Value.able, decision, would it?

Can’t watch the video on your iPhone or iPad? Visit youtube.com/rogerjmontgomery.

If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).

Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 29 July 2011.